Transition Plans in Banking: From Compliance to Strategic Advantage

As the shift toward a net-zero economy accelerates, banks face mounting pressure to realign their business models and credit portfolios with the 1.5°C pathway while maintaining financial resilience. Strategic transition planning has therefore become a strategic management task rather than a compliance exercise. Its effectiveness determines whether institutions can translate climate ambition into actionable steering, manage emerging risks and retain credibility with regulators, clients, and investors. At the same time, banks must navigate heterogeneous sectoral pathways, data limitations and the trade-off between long-term resilience and short-term profitability. This article is based on the cluster initiative on transition plans and outlines the key strategic trade-offs, investor expectations and organisational building blocks that banks need to turn transition plans into a strategic management tool [see Sustainable Finance Cluster 2025].

Embedding Transition Planning across the Bank

A holistic approach to transition planning spans four interdependent domains as shown in Figure 1: Ambition & Targets, Business Model, Risk Management and Governance. Given the complex links between climate risks, business transformation and long-term resilience, banks need to address these domains in an integrated way. Only then can transition planning act as a driver of strategic transformation rather than a fragmented response to regulation. Compliance & Reporting, the fifth dimension, is further discussed in our position paper on transition plans [see Sustainable Finance Cluster 2025, pp 14-17]. Insights from practice indicate that transition planning often involves navigating trade-offs between ambition, business risk and profitability. Acknowledging these challenges is critical for managing expectations, adjusting targets and protecting long-term strategic positioning.

Most banks use the 1.5°C (or net-zero) target scenario as their guiding reference, usually relying on the “Net Zero Emissions by 2050 Scenario“ (NZE) pathway from the International Energy Agency [see IEA 2025, p. 7]. However, the speed, trajectory and feasibility of transitions vary across sectors due to technological and structural differences. As a result, some banks employ multiple climate scenarios for resilience assessments and stress tests. The uncertainty in climate science and policy further complicates the planning process and increases the tensions. Deviating from a pathway potentially entails reputational and regulatory risks, such as exposure to carbon pricing or shifting policy regimes. There is also ambiguity around target-setting: should banks commit to highly ambitious goals and risk missing them, or set conservative targets that may be exceeded?

One fundamental challenge of banks is that financed emissions (Scope 3) account for approximately 96% of their emissions [see PwC 2025]. Therefore, banks significantly depend on the ambitions, commitments as well as credible information from their clients. Due to this dependency, there are material business risks embedded in the 1.5°C trajectories. Committing to these pathways may result in reduced business opportunities and profitability if clients or entire sectors fail to transition accordingly. In such cases, banks face a dilemma: phasing out clients or sectors may trigger revenue loss in the short-term. However, inaction could lead to default risks in the long-term as well as reputational damage or greenwashing accusations.

Against this backdrop, physical risks are increasingly outpacing transition risks. Although, individual banks have limited influence over these macro-level developments, they have control over the types of risks and sectors they choose to include in their portfolios. Further, they have the option to offer products and services to assist clients to mitigate physical risks.

These tensions can be addressed through transparent communication and structured planning. A strong transition plan is not just a roadmap; it is a tool for internal alignment and external credibility. It enables banks to navigate complexity and maintain strategic flexibility. And this is the information that investors are looking for, that, among others, can help inform their decisions.

Investor Perspective

From an investor perspective, transition plans are critical inputs for investment decisions. Investors can view those plans through a multifaceted lens encompassing risk assessment, opportunity identification, and strategic alignment evaluation. A key question is how companies address climate-related risks and opportunities across the pillars of the TCFD framework: governance, strategic business planning, risk management and metrics & targets [see TCFD 2021].

Well-designed transition plans are not standalone documents but part of a company’s long-term strategy, showing how climate strategy links to operational performance, financial impact and revenue generation. Internally, they help management focus attention and assess progress against long-term goals. Externally, they enable stakeholders to understand how companies plan to adapt in a transforming economy.

When assessing credibility, investors look for clearly defined targets, sufficient resources (including capital expenditure) dedicated to transformation and evidence of progress. Governance and accountability are another key aspect. Investors examine responsibility structures and whether there is executive-level ownership of implementation. Plans that support risk assessment and capital allocation demonstrate integration of climate strategy with business strategy and operations, robust governance, transparent resource allocation and measurable targets with regular progress reporting.

By contrast, several practices raise red flags: prioritising visual appeal over substantive content, unclear accountability without meaningful executive engagement, extensive qualitative narrative without quantitative targets and a lack of transparent reporting on progress towards stated goals. As climate considerations increasingly affect investment decisions, the quality of transition plans can shape capital flows and corporate valuations and will test how well banks are positioned internally to meet these investor expectations.

Conclusion & Outlook

Transition planning is moving from a one-off project to an ongoing management task. For banks, it becomes a central tool to turn climate objectives into a concrete course of action, align internal stakeholders and give supervisors and investors a consistent narrative. In an environment of accelerating transition and physical risks, the point of a plan is less to predict the future than to define how the institution will respond to different futures in a structured way.

In the coming years, three priorities stand out for banks. First, transition planning must be anchored in the regular steering architecture so that climate issues are built into business planning, risk appetite and performance management. Second, operating models and governance need sharpening: clear responsibilities, robust decision processes and workable escalation paths are required to turn commitments into day-to-day action. Third, banks need a solid data base to understand portfolio exposures, compare scenarios and track progress.

Our upcoming 2026 cluster initiatives will broaden the scope by looking at two emerging topics. First, we will take a closer look at nature and biodiversity, examining how banks can set nature-related targets and integrate them into transition planning. In parallel, we will explore how AI-based solutions can help financial institutions manage the growing complexity of ESG data, enhance risk assessment capabilities, and strengthen the analytical foundation that effective transition planning requires.